Introduction to Foreign Direct Investment - Interdisciplinary issues in Indian Commerce | Interdisciplinary Issues in Indian Commerce - B Com PDF Download

What is a 'Foreign Direct Investment - FDI'

Foreign direct investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company. Foreign direct investment  are distinguished from portfolio investments in which an investor merely purchases equities of foreign-based companies. The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision making of a foreign business.

BREAKING DOWN 'Foreign Direct Investment - FDI'

Foreign  direct investment are commonly made in open economies, as opposed to tightly regulated economies, that offer a skilled workforce and above average growth prospects for the investor. Foreign direct investment frequently involves more than just a capital investment. It may include provision of management or technology as well.

Methods of Foreign Direct Investment

Foreign direct investments can be made in a variety of ways, including the opening of a subsidiary or associate companyin a foreign country, acquiring a controlling interest in an existing foreign company, or by means of a  merger or joint venture with a foreign company.

The threshold for a foreign direct investment that establishes a controlling interest, per guidelines established by the Organization of Economic Cooperation and Development (OECD), is a minimum 10% ownership stake in a foreign-based company, typically represented for the investor acquiring 10% or more of the ordinary sharesor voting shares of a foreign company. However, that definition is flexible, as there are instances where effective controlling interest in a firm can be established with less than 10% of the company's voting shares.

Foreign direct investments are commonly categorized as being horizontal, vertical or conglomerate in nature. A horizontal direct investment refers to the investor establishing the same type of business operation in a foreign country as it operates in its home country, for example, a cell phone provider based in the United States opening up stores in China. A vertical investment is one in which different but related business activities from the investor's main business are established or acquired in a foreign country, such as when a manufacturing company acquires an interest in a foreign company that supplies parts or raw materials required for the manufacturing company to make its products. A conglomerate type of foreign direct investment is one where a company or individual makes a foreign investment in a business that is unrelated to its existing business in its home country. Since this type of investment involves entering an industry the investor has no previous experience in, it often takes the form of a joint vebturewith a foreign company already operating in the industry.

Foreign Tax Credit

A  non - refundable tax credirt for income taxes paid to a foreign government as a result of foreign income tax withholdings. The foreign tax credit is available to anyone who either worked in a foreign country or has investment income from a foreign source.

BREAKING DOWN 'Foreign Tax Credit'

The Foreign Tax Credit is claimed on Form 1116, unless the taxpayer qualifies for the de minimis exception. The credit can only be claimed on income that is also subject to domestic taxation.

For example, if some of the taxpayer's foreign income is taxable and some is exempt, then the taxpayer must be able to break down the taxes paid on the foreign income only, and only claim the credit for taxes paid on that foreign income.